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The Landscape of SME Finance in Bangladesh

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The Landscape of SME Finance in Bangladesh The landscape of SME finance in Bangladesh An analysis of providers, product s, requirements and constraints What is this resource? This report depicts the landscape of financing options for small and medium-sized enterprises (SMEs) in Bangladesh. It provides guidance on how policy makers, financiers and SME entrepreneurs could enhance access to finance. The report was written by Barclay O’Brien of Challenges Consulting, to help identify financing options for inclusive businesses supported by the Business Innovation Facility. Many kinds of SME financing are reviewed: debt finance from commercial banks, development banks, MFIs and NBFIs; equity finance from venture capital funds, sovereign funds and private equity funds; and concessional assistance from bilateral donors and development agencies. Why is it interesting? We believe this to be the first report of its type that provides an overview of the broad financial landscape, covering not only larger well established players, but also new players such as Impact Investors. The report goes beyond listing providers and volumes, to look at financial products, requirements, constraints and opportunities. Who is it for? The analysis will be invaluable for anyone operating in the financial sector in Bangladesh, or supporting SMEs to access finance. The Bangladesh example, where SME finance is a priority and yet constraints remain, will also be a useful contribution to international understanding of SME finance. Others, including SME entrepreneurs, may find the four-page summary report a more useful overview of the main types of finance available. This can be found at: http://bit.ly/TJ1gWu. Since the potential for renewable energy is substantial in Malawi, the case described here for GTC has great potential for replication with other businesses and sites. Table of Contents Introduction .................................................................................................................... 3 1. Definitions ............................................................................................................... 4 2. The role of SMEs in Bangladesh ........................................................................... 6 3. Access to finance in Bangladesh ......................................................................... 8 4. Providers of finance ............................................................................................. 11 4.1 Banks ...................................................................................................................... 11 4.3 MFIs ........................................................................................................................ 15 4.4 Cooperatives and Associations ........................................................................... 19 4.5 Impact Investors .................................................................................................... 19 5. Supply of products and requirements ................................................................ 23 5.1 Banks and NBFIs ................................................................................................... 23 5.2 MFIs ........................................................................................................................ 24 6. Access to advice and support for finance ......................................................... 25 6.1 Financing ................................................................................................................ 25 6.2 Other Support ........................................................................................................ 26 7. Common limitations for SMEs and providers .................................................... 28 7.1 Clients ..................................................................................................................... 28 7.2 Suppliers ........................................................................................................... 30 8. How SMEs can improve access to finance ........................................................ 32 8.1 Best Practices for SMES ....................................................................................... 32 8.2 Other Steps ............................................................................................................ 33 9. Conclusion ............................................................................................................ 34 9.1 How SMEs Should Proceed .................................................................................. 34 9.2 Some Possible Changes ....................................................................................... 34 Organisation ................................................................................................................ 39 Contact ......................................................................................................................... 39 Location........................................................................................................................ 39 2 Introduction Business Innovation Facility (BIF) Bangladesh is a UKAID-funded project. BIF aims to support enterprises with Inclusive Business (IB) models in the development of least developed countries and currently operates in 5 countries: Bangladesh, India, Nigeria, Malawi and Zambia. BIF’s work can be viewed at the web site: www.businessinnovationfacility.org IB refers to a profitable core business activity that also tangibly expands opportunities for the poor and disadvantaged in developing countries. The social benefits of IBs include: Increased employment opportunities for marginalised groups The growth of markets for local smallholders and tradesmen Potential food security improvements Pursuant to its objective, BIF has worked with several key local organizations, such as Rahimafrooz Superstores Limited, ACI Group Agri-business Division and CARE Bangladesh, to develop successful and sustainable IB solutions. The concept of IBs is not widely known, especially amongst banks, Non-Bank Financial Institutions (NBFIs) and other finance providers. IBs can be compared to Small and Medium Enterprises (SMEs), as normally an IB will be of a similar size. Therefore, the research for this project has used “SMEs” as an alternative for “IBs” where the context required or it otherwise made sense to do so. Challenges Consulting is part of the Challenges Worldwide group and works on behalf of BIF: see www.challengesworldwide.com. Challenges were asked to conduct a survey of the financial landscape for access to finance for IBs in Bangladesh. Challenges used both quantitative and qualitative research methods in undertaking this supply side survey. Data was collected from both primary and secondary sources. In regard to the latter, Challenges conducted a review of available data and documents, in order to gain an overall view of the Bangladesh market, to ensure that the detailed research is based on a strong up to date factual foundation and to grasp the recent changes that have taken place and how those changes affect the supply of finance. This report was prepared at the end of a field trip conducted by Barclay O’Brien over the period from 1 to 17 June 2012. The fieldwork comprised face to face interviews with pre-arranged respondents in the following categories: banks, NBFIs, microfinance institutions (MFIs), the central bank, government programs, donors, NGOs, equity providers and agro-enterprise companies. As a result, consideration was given to many kinds of financing, such as debt finance from commercial banks, development banks, MFIs and NBFIs. Secondly, this survey also looks at the available forms of equity finance from venture capital funds, sovereign funds, and private equity funds. Thirdly, Challenges considered a range of financial assistance from bilateral donors and development agencies. The above fieldwork involving direct interviews with institutions was supplemented with aggregate data obtained from Bangladesh Bank and other sources. As a result, a national picture was obtained. However, it was not possible to interview and/or obtain data from every finance provider in Bangladesh and, by omitting to mention other suppliers in this report, there is no intention to downplay the role and products of those organisations. Meetings were also held in Singapore on 29 to 31 May 2012 with various impact investors and the Impact Investment Forum. The initial findings were presented by Barclay O’Brien at the ISCEA Agribusiness Supply Chain Conference held at the Radisson Blu Water Hotel in Dhaka on 17 June 2012. 3 1. Definitions A key issue for this Access to Finance study is how to define SMEs. SMEs are now normally defined in Bangladesh according to the definition used in the National Industry Policy of 2010, as follows: Client Size Definition Manufacturing: Fixed asset value* between Tk5m and Tk100m (US$62,500 to 1.25m) or 25 to 99 employees Small Service and Trading: Fixed asset value* between Tk0.5m and Tk10m (US$6,250 to 125,000) or 10 to 25 employees Manufacturing: Fixed asset value* between Tk100m and Tk300m (US$62,500 to 3.75m) or 100 to 250 employees Medium Service and Trading: Fixed asset value* between Tk10m and Tk150m (US$125,000 to 1.875m) or 501 to 100 employees * Fixed asset value is excluding the value of land and building (so that the SME’s choice of whether to rent or own premises is not decisive). The same definition has been adopted by Bangladesh Bank (BB), the
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